Investing in financial instruments that provide a fixed rate of return is a popular way of saving money. Afterall, there’s no risk to the capital and the income is known and assured till the end of the maturity period. There are several fixed income investment options such as fixed deposits and post office small savings schemes that are already popular with many investors. As these investments offer a fixed return, they are more suitable for capital preservation rather than capital appreciation.
If you are looking to invest your money, here are some situations when investing in fixed income investment options may not suit you to meet your goals.
If you want to create wealth over long term
The fixed income schemes come with an assured return which are generally on the lower side. NSC, fixed deposits and other such schemes offer returns which are low. Unless you invest in instruments that have returns that can beat inflation over the long term, building wealth to meet long term goals may not be possible. Use fixed income investment options for preserving capital and use market-linked investments such as equity mutual funds and debt funds for growing your money over the long term.
If your goals are not to be met soon
If your goals or the need for funds is near, it’s safe to park funds in fixed income investment options. Otherwise, if the goals are far off, equities as an asset class have shown the potential to outperform over the long term. The
If you want to generate high inflation beating returns
Wealth over the long term is created when you are able to generate a return higher than inflation. If the inflation is hovering around 5 -7 per cent, you need to generate at least a few percentage higher return than inflation to build wealth. The fixed income investment options do not have the potential to do so as they are debt assets.
If you want high tax effective returns
Most fixed income investment options such as NSC, KVP, fixed deposits provide a fixed return but the entire income is taxable in the hands of the investor. So, if you are in the highest tax slab of 30 per cent, nearly one-third of your income gets taxed. In order to generate higher tax efficient returns you need to invest in equities where only 10 per cent of tax is levied on gains above Rs 1 lakh in a year.
If you want liquidity of your funds
Most fixed income investment options come with a lock-in period and, therefore, the liquidity is a major concern in them. A better alternative could be to park funds in debt funds that offer liquidity with a high tax efficient returns as well.